Technical analyst Brian Hoffman sets share price support levels for three mainstream blue chip stocks, gold and silver bullion, six precious metals stocks and a gold ETF during the traditionally weak half of the year. A breach of these support levels could prompt trading volatility and some buying opportunities.

The broader US stock market indexes may have set record highs and Canadian stocks, as measured by the S&P/TSX Composite Index, are holding up. But the strength of their price moves has weakened from a technical analysis perspective.

Welcome to the seasonally weak half of the year for the stock market, which typically runs from early May to late October. During the bull market that emerged from the wreckage the 2008 financial crisis left behind, the seasonally weak half of the year hasn’t really punished investors. Not for any length of time anyway.

Pullbacks or corrections have been mild and short-lived at worst as the stock market has generally quickly bounced back and moved on to higher levels. As a result, investors who have stayed the course, either by ‘buying the dips’ and holding on to their winners, have been rewarded as the broader stock markets have moved higher.

Sell in May and go away

As many readers may already know, the seasonal investing approach involves reducing portfolio holdings of stocks at the end of the seasonally strong half of the year (early May) and increasing them at the start of the seasonally strong half of the year (late October).

The theory is that stock market returns are better during the seasonally strong part of the year than during the weak half of the year. Those results are backed up by stock market price data covering several decades during the 20th century.

The more important benefit from this investment approach is that investors can spare their portfolios from fairly damaging stock market free-falls. That’s because that carnage often happens during the seasonally weak half of the year.

In other words, the majority of the time the bad stuff happens to the stock market between early May and late October—particularly during September and October, which are known as the most treacherous months for the stock market.

This year, stock market pullbacks could affect the share prices of Canadian companies more than U.S. companies. That is, until technical strength returns to the financial, energy and precious metals sectors.

So far this year, the broader North American stock market indexes, based on the S&P 500 Index and the S&P/TSX Composite Index, have only experienced mild pullbacks. That’s because, as of early June, their drops hadn’t reached the 10 per cent threshold to be considered a correction.

Although US stocks are marching higher, price weakness will likely return over the next few months, whereas technical strength may not return to Canadian stocks until the S&P/TSX Composite Index first moves lower.

For US stocks, watch for the S&P 500 Index to hold support at the 2,250 level should a pullback of any significance start to unfold. With Canadian stocks, the S&P/TSX Composite Index’s first level of key support rests at 14,500.

Pullbacks to any of those support levels are considered healthy, but breaches of those levels could increase the intensity of the selling pressure.

Investors shouldn’t abandon stocks completely, but should watch for breaches to key support levels—both for the broader stock market indexes and particularly with individual stocks owned within an investment portfolio.

Rather, whether investors own positions in exchange traded funds with broader stock market exposure or positions in individual stocks, they should watch support levels very carefully in this environment.

With mainstream stock market holdings, investors are best to stick with shares of stalwart blue chip stocks that have solid balance sheets and growing revenues. For example, companies whose shares continue to perform well include George Weston Ltd. (TSX—WN), Fortis Inc. (TSX—FTS) and Northland Power Inc. (TSX—NPI).

Shares of George Weston, the biggest shareholder of Loblaw Companies Limited (TSX—L), have key support at $115, then at $110. For Fortis and Northland, which are dividend plays in the utility sector, watch whether their share prices hold support levels at $40 and $21, respectively, during a pullback.

Gold ETF testing new support levels

Moving on to precious metals stocks, in my Investor’s Digest article published in March, I warned that a rising (bearish) wedge had formed in the short-term price chart for the iShares S&P/TSX Global Gold Index ETF (TSX—XGD) which foreshadowed a pullback to $13 per unit or lower, depending on the selling pressure.

Since then, XGD’s unit value tested a support level of $12.50 per unit for a second time in two months. A third test of that level could result in a breach of that level, which could see the unit value revisit the December low of about $11.

As well, gold and silver bullion prices are facing significant resistance levels once again. For the rally to continue, gold and silver prices need to make meaningful moves above US$1,300-an-ounce and US$18.50-an-ounce, respectively.

To the downside, a breach of support levels at US$1,200-an-ounce for gold and US$16-an-ounce for silver could result in those metals testing their December lows.

3 more precious metals stocks to consider

The pullback in the precious metals sector, since the rally halted in early February, offers interesting opportunities to take positions in the shares of miners. The precious metals bull market is in its early innings and should continue for several more years.

In fact, the next upward leg could easily dwarf the rally the precious metals sector experienced during the first half of 2016, when XGD’s unit value doubled in price.

Along with the other miners I’ve profiled in my recent articles, they are increasing their production, which will allow them to benefit from rising bullion prices. They are also well-financed and are managing their production costs. They have also reported increased profitability in recent quarterly financial results.

The share price of Kirkland Lake, a gold producer with operations in Northeastern Ontario as well as in Australia, may find support at $9 during a pullback. The share price of Silver Standard Resources, primarily a gold producer despite its name, has support at $11 a share.

The share price of Argonaut Gold, which has gold production in Mexico, doesn’t have support until $1.50, which was the low point in December.